IMF says European banks need urgent asset clean-up, consolidation

| WASHINGTON

WASHINGTON Oct 5 European banks need "urgent
and comprehensive action" to address legacy non-performing loans
and bloated, inefficient business models that threaten to
cripple them with too-low profits, the International Monetary
Fund said on Wednesday.

In its latest assessment of global financial stability, the
IMF said weak profitability in a low-interest-rate, low-growth
environment could erode European banks' buffers over time,
undermining their ability to support an economic recovery and
weakening stability.

The warning comes as questions swirl through financial
markets over Deutsche Bank. Germany's largest lender
has been engulfed by a crisis of confidence since the U.S.
Department of Justice last month demanded up to $14 billion to
settle claims that Deutsche missold U.S. mortgage-backed
securities before the financial crisis - an amount viewed as
major drain on its capital.

Though the IMF report does not single out specific banks by
name, Deutsche's health is expected to be a key topic of
discussion when commercial bankers, central bankers, finance
ministers and other policymakers converge in Washington this
week at meetings of the IMF, the World Bank and the Institute of
International Finance, a global trade group. Among those in
attendance will be Deutsche Bank's chief executive, John Cryan.

"In the euro area, excessive nonperforming loans and
structural drags on profitability require urgent and
comprehensive action," the IMF said in the report. "Reducing
nonperforming loans and addressing capital deficiencies at weak
banks is a priority."

The report said many European banks are still struggling
with high levels of impaired assets and low profitability, due
to loan problems left over from the last financial crisis. Even
if a cyclical recovery were to gain steam in the region,
profitability would be too low for many banks to regain health
and resolve problem assets, it said.

The report recommended that European regulators and
policymakers strengthen insolvency regimes to allow banks to
foreclose on legacy non-performing loans more quickly, while
weaker banks need to be consolidated into stronger ones and
costs need to be reduced.

"There are simply too many branches with too few deposits
and too many banks with funding costs well above their peers,"
the IMF's deputy direct of monetary and capital markets, Peter
Dattels, said in a statement. "Addressing these business model
challenges is vital to ensure sustainable profitability."

Adoption of these measures, along with regulatory changes
that boost confidence without a massive increase in capital
requirements, could boost European banks' profitability by $40
billion annually. Combined with a cyclical recovery, they could
boost the share of European banks considered "healthy" to 72
percent from 17 percent last year.

Despite the weakness in Europe, the IMF found that overall
risks to global financial stability have declined since its last
report in April. The recovery in commodity prices has aided some
emerging markets and fears over China's economic slowdown have
been eased by government policies aimed at shoring up growth.

The initial shock of Britain's vote to leave the European
Union was well absorbed by markets and did not turn into a
global contagion, the IMF said, adding that fallout now looked
"more local than global."
(Reporting by David Lawder; Editing by Leslie Adler)